Over at the Cato Institute, Mike Tanner writes that
“If workers who retired in 2011 had been allowed to invest the employee half of the Social Security payroll tax over their working lifetime, they would retire with more income than if they relied on Social Security. Indeed, even in the worst-case scenario—a low-wage worker who invested entirely in bonds—the benefits from private investment would equal those from traditional Social Security.”
I’ve made similar calculations and they’re right. That said, these kinds of analyses need to better account for:
a) Market risk: we really don’t know a lot about long-term market returns because we have so few non-overlapping periods of data from which to sample. If we’ve got good data since, say, around 1870, that means that for 30-year holding periods we have a sample of four. Not much to go on. If we look at the risk of single-year returns and then extrapolate over longer periods, we’ve got a much bigger sample – and the potential downside risk looks a lot worse; and
b) Transition costs: Grandma’s benefits aren’t going to pay themselves, and they’re going to get paid at all if I take my payroll taxes out of the system. So we need to put in extra money during that transition period as accounts are built up. Mike is right that financing the transition with spending cuts is better than with tax increases. But does it really make a difference? If we cut spending and I get to keep the proceeds, I’m better off (assuming that the spending is wasteful). But if we cut spending and it’s used to finance the transition, I’m not better off. In any case, it’s really the spending cuts, not the accounts, that are doing the leg-work here.